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On the Impact of Forward Contract Obligations in Multi-Unit Auctions

  • de Frutos, Maria-Angeles
  • Fabra, Natalia

Several regulatory authorities worldwide have recently imposed forward contract obligations on electricity producers as a way to mitigate their market power. In this paper we investigate how such contractual obligations affect equilibrium bidding in electricity markets, or in any other auction-based market. For this purpose, we introduce forward contracts in a uniform-price multi-unit auction model with complete information. We find that forward contracts are pro-competitive when allocated to relatively large and efficient firms; however, they might be anti-competitive otherwise. We also show that an increase in contract volume need not always be welfare improving. From a methodological point of view, we aim at contributing to the literature on multi-unit auctions with discrete bids.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6756.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6756
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